Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, July 05, 2006

Just when you need a good hook…along come 2

Part of the fun of blogging is trying to find a hook around which to build a story. When Nancy Humphries was named as CEO-Elect at NIRI, she named “hedge funds, and their ownership of public companies” as one of the issues that she needed to get on top of. And for those listening to the hedge fund panel at last month’s NIRI conference, you can understand why.
The chair of session affirmed that 47% of the equity of his company was owned by hedge funds, and a show of hands indicated that this was not unusual. So surely such a pervasive industry should be regulated, with benefits including increased transparency? Not at all, said the hedge fund panellists; we believe that self regulation is best.
This view has won support in the EU. A group of banks has advised the European Union against increased regulation of hedge funds but suggested a minimum investment threshold designed to keep smaller investors from participating in the high risk industry. Experts from banks including Citigroup, Goldman Sachs, and Deutsche Bank said additional rules would not provide additional investor protections and were "likely to fail."
The group said a minimum investment limit should be set at about $64,000 to "prevent access to hedge funds by investors for whom such investments are not suitable." The recommendations come after U.S. regulation of hedge funds is in disarray. The Securities and Exchange Commission was recently stopped from regulating funds, and at a recent government hearing, a former SEC lawyer accused the industry of widespread illegal activity.
The European panel said that funds required "unrestricted" investment freedom and said current regulations have worked to create a solid foundation. Instead of more rules, the panel advocated for a reduction in barriers to cross border investment. The report said, "The group calls on European regulatory authorities to adopt a policy of enlightened self-interest. This would recognize that attempts to further regulate this evolving industry will drive the business and its investors offshore or lead to the packaging of hedge fund-based investments in other forms."
However, the report’s conclusions are not representative of the Commission's views and the Commission will release its own conclusions later this year.
Separately, the European Central Bank warned last month that hedge funds were a major risk for global financial stability as they tended to invest along similar lines and large losses could hit the entire industry very hard. However the banks’ report rejected this, saying hedge funds often take alternative market views and changed their portfolios much more frequently than traditional funds.Meanwhile, the U.S. Congress is also targeting the $2.4 trillion hedge fund industry. The Senate Judiciary Committee held a hedge fund hearing last week, with its star witness Gary Aguirre, a former Securities and Exchange Commission investigator who said superiors quashed a probe into insider trading.


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